StreetTalk: Enter the Dragon: China Biopharm Market is a Land of Opportunity for Investors

Big market + Low Competition = $$$$$$. These days you might as well write this formula in Mandarin Chinese because it's the exact recipe for success that more and more biopharm companies are brewing in China.

Let's take a look at the numbers. China accounts for roughly 20% of the world's population (in comparison, the US accounts for 5%) but it corners only 1.5% of the worldwide pharmaceutical market.

That won't last long as the life sciences industry in China is growing at a 10% per year clip and has been over the last decade. It's the ninth-largest drug market in the world and by 2008, will step up to the 8th spot. (Wall Street pegs the overall market at $10 billion in 2006.)

As China's burgeoning middle class settles in for some of the creature comforts enjoyed by its counterparts in Europe and North America; (things like Burger King Whoppers and Buick convertibles); the need for drugs and medicine to satisfy China's booming health care needs is paramount for the country.

And, needless to say, paramount for companies in the biopharm industry that would love to get there first.

GOLDEN OPPORTUNITY

US drug companies are heading in that direction. To get there, they'll have to sidestep Chinese drug companies, which comprise 70% of the life sciences companies in the region, and clear onerous regulatory hurdles initiated by the Chinese government, which historically has treated foreign companies much like a teetotaler treats an open bar. Right now there are about 3,500 biopharm companies operating in China. That number is down from 5,000 in 2004, so the arena is already swallowing up pretenders and wanna-be's.

Consider the fact that over 38% of Chinese biopharm companies are state-owned, giving them a distinct advantage over Western competitors. And, many of these companies not only produce the prescription drugs they sell, they also own and operate the pharmacies that sell those drugs. Imagine you were a Bacardi Rum salesman and half the bars you visit used their own rum. How many cases of rum could you sell? Not too many.

Still, Chinese pharmaceutical companies have no shortage of competitive issues. Compared to Western giants like Merck and Roche, Chinese drug companies are much smaller in size, and are much less innovative in areas like technology and financing. One Wall Street pundit points out that the overall research and development for all Chinese life sciences companies combined doesn't match up to the R&D efforts of any of the top five Western drug companies.

But a closer look at the numbers reveal a potential gold mine for Western life sciences companies and investors who pour money into them looking for a good return.

The top 10 Chinese companies in the biopharm sector account for only 20% of the market. But in the US, the top 10 companies account for 50% of the market. That gap between China and the US indicates that there is plenty of room for growth for Western companies in the China market.

Granted, this is no secret to Western drug makers. Roche touts China as one of its ten-largest global markets and plans to increase over-the-counter drug sales by 50% by 2010. Novartis and Wyeth are also pouring billions into the Chinese market.

STEPS TO SUCCESS

What does the competitive landscape look like for Western biopharm companies hurdling the Great Wall?

It's not as intimidating as you might think, once you get past the state-sponsored control of a large part of the biopharm market in China. First, most Chinese pharmaceutical companies are generic drug makers, leaving the brand name prescription drug market to outsiders. American pharmaceutical companies with savvy marketing plans should be able to make inroads in the Chinese drug market by convincing increasingly health-conscious Chinese that they're putting their health in jeopardy by using second-tier drugs.